How the Gulag Lives On in Russia’s Prison Economy

When the state has mineral resources, it hires a company like Royal Dutch Shell to extract the oil and share the profits. But when it has an abundant supply of labor, it turns a blind eye to its resources being used in tolling schemes right out of the 1990s. The existing penitentiary system is not in the interests of the state or the prisoners.

The gulag, as the Soviet Union’s Main Administration of Corrective Labor Camps and Labor Settlements was better known, may have been transformed into Russia’s Federal Penitentiary Service (FSIN), but its essence arguably remains unchanged.

Russia has by far the biggest proportion of people behind bars in Europe, with an incarceration rate of 434 prisoners per 100,000 people, compared to 143 in the UK, 130 in Spain, 101 in France, 92 in Italy, and 76 in Germany.

The state of Russia’s judicial and criminal justice systems is such that no neutral observer would describe them as just or socially equitable. The obsolete infrastructure, the abysmal level of staff training, the lack of transparency and information, the outdated understanding of the rationale for punishment, and the complete absence of resocialization programs are just some of the flaws inherited from the gulag. However, there is one aspect of the system that has received very little attention: the practice of nationalizing losses and privatizing profits.

The objective of the pervasive violation of prisoners’ rights today is not to force them to build major infrastructure projects for the sake of national interests or industrialization. Nor is it even “reeducation through labor.” The sole raison d’être of the system is to serve the private commercial interests of individuals who draw their salaries from budget funds.

The basic scenario is a tolling scheme. Every correctional facility has its own production unit, such as a sewing factory or a woodworking or metalworking shop. Operating expenses, such as electricity and the salaries and living expenses of the prisoners, are covered by the state. Some funding also comes from the prisoners’ salaries, though the amounts are miniscule. (Under Russian law, prisoners must compensate the state for their food and clothing, and up to 75 percent of their salaries may be deducted for that purpose.)

The lion’s share of profits are either accumulated on the accounts of intermediary companies that buy goods produced by the prisoners, or returned to the heads of the correctional facilities through kickbacks by companies that purchase the goods directly. The facility itself receives only a fraction of the profits after factoring in all of its expenses—or, more precisely, all of the federal budget’s expenses.

This is exactly how many industrial enterprises were bought up in the 1990s in Russia. Back then, trade houses were set up next to Soviet-era plants: the plants would sell goods to the trade houses at incredibly low prices, and the trade houses would then sell the goods at a huge markup. The plants would gradually slide into bankruptcy, while the trade houses would amass the funds to buy up their shares.

In the penitentiary system, this scheme is used to siphon off and privatize profits rather than assets. Profits are collected by specific individuals who run the facility, rather than by the correctional facility itself. The following examples of this corruption occurred at specific correctional facilities, have been covered by the media, and are supported by evidence from individuals who are prepared to vouch for the information.

Alexey Kozlov, a financial expert who served a sentence at a correctional facility in the Tambov region (and who, in the interests of full disclosure, is the author’s husband), described a scheme revolving around the production of woolen socks in the region’s Rasskazovsky district.

“All deputy heads of correctional facilities have their own shops, though they do not control them directly. The relatives of these officials lease shops in the facilities’ industrial zones, where the prisoners sew the socks. There is no ‘going market rate’ for production space in correctional facilities, so any price can be set. It’s the relatives who sell the socks and collect the profits.

“Naturally, it would be more profitable for the correctional facility to produce and sell goods directly. However, then it would be obvious if it was selling the socks at half the market price, and the embezzlement would be exposed. With tolling operations, just as with the leasing of shops, it is difficult to prove the details of the corruption.”

The FSIN has all sorts of excuses to explain why tolling schemes are used. The main argument is that the correctional facility does not have the funds to purchase equipment and materials. However, it will never have the funds if it keeps privatizing profits and nationalizing losses. When the state has mineral resources, it hires a company like Royal Dutch Shell to produce oil and share the profits. But when it has an abundant supply of labor, it turns a blind eye to its resources being used in tolling schemes right out of the 1990s.

In other cases, production is not even the objective of the tolling scheme, but merely a screen for expenses. One good illustration is agricultural production at correctional facilities, such as the findings of Alexey Fedyarov, a retired prosecutor and a coordinator at Rus Sidyashchaya (Russia Behind Bars), a prisoners’ rights organization. The results of his research were published by local media in Novosibirsk and by RFE/RL.

Under this scheme, correctional facilities receive money to farm land. But the agricultural scheme is fictitious: a visit to the fields cited in the state contracts and the addresses of the contract counterparties is enough to show that. Despite this, on paper, the facility puts out a surplus of agricultural produce that it begins to sell off through state procurement contracts. Its sets prices that are too high for anyone else to be interested, so only other correctional facilities “buy” this “produce.”

This is why the goods are sold by the correctional facility itself, and not by the regional FSIN directorate. Other facilities, which are also independent legal entities, cannot purchase products from the FSIN, but they can buy surplus goods from different facilities.

Another scheme exposed by Alexey Kozlov is the sale of prisoners’ labor, the primary asset of most correctional facilities.

“Close to Penal Settlement 13 in the Kokhma settlement of the Ivanovo region, there is a state-owned farm, Sovkhoz Teplichny. The farm has agreements with the minimum-security penitentiary facility under which prisoners work at the farm. The prisoners work ten hours a day, seven days a week, in violation of Russian labor law, which sets a maximum workweek of forty hours, and requires Saturday and Sunday hours to be compensated as overtime at double the hourly rate. Prisoners don’t report these violations, as speaking up can jeopardize their chances of early release, and no one wants to risk that.”

“The money-making scheme is simple. Sovkhoz Teplichny officially pays only for forty hours of labor a week. Payment for the difference between those hours and the actual hours worked is made to the management of the facility ‘under the table.’ If prisoners officially work overtime, the facility would get more money for the prisoners’ salaries—and should deduct up to 75 percent of the amount to compensate for living expenses paid from the federal budget. However, if there is no salary, then there are no deductions. In other words, all expenses are transferred to the state. The state covers room and board for every prisoner, even though the prisoners should be able to compensate a significant share of these expenses from their wages.”

Such schemes are extremely common in the penitentiary system. There are some relatively honest heads of penitentiary facilities (relatively, because their facilities may report and earn large profits, but the directors may still be skimming off small amounts to boost their incomes), but care must be taken not to reveal their identities, because the head of a penitentiary facility who is openly mentioned in a favorable light can get into serious trouble.

An honest and more transparent economy for penitentiary facilities—one that serves the interests of the state and of the prisoners—is possible. However, the existing limited oversight of the system encourages precisely the opposite.